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Management Accounting as an Aid to Management
Part 3
Using Financial Information to Manage a Business
8 Management Accounting as an Aid to Management
8.1 Introduction In the remainder of this book we will be looking at the financial information which is necessary to help managers to run the business; that is, we will be discussing the internal management accounts which are not usually made available to the public. In this chapter we will be reviewing the need for management accounting information and discussing the differences between financial accounting and management accounting.
The financial information that you have learned about so far in this book has been in aggregate form. However, aggregate income statements and balance sheets prepared on an historical cost basis do not provide the answers to questions such as the following: ◆ What did it cost to operate Department A last period? ◆ What will it cost to operate Department B next period? ◆ If we decide to close Department C and instead outsource the
work undertaken in that department, what will be the effect on the organisation’s total cost? ◆ Should we accept this order for a batch of Product X? ◆ What price should we charge for a delivery from London to Edinburgh? ◆ Will the proposed investment in new computer equipment be worthwhile? The financial accounting information that we have reviewed so far will not help managers to answer these questions. More detailed and forward-looking information is needed, and this need is met by an organisation’s management accounting system. The management accounting department provides an internal information service to managers to help them to manage.
Accounting in a Nutshell
8.2 The need for detailed management accounting information
223
8.3 The core activities of management accounting The main activities of the management accounting function could be described as follows:
Accounting in a Nutshell
◆ Participation in the planning process at both strategic and
operational levels. In Chapter 11 we will be reviewing the role of financial budgets in the planning process. ◆ The initiation of and the provision of guidance for management decisions. Chapters 9 and 10 will demonstrate how cost information can be analysed to assist managers in their decisionmaking role. In Chapter 12 we will review the main investment appraisal techniques that are used as a basis for making capital investment decisions. ◆ Contributing to the monitoring and control of performance through the provision of reports on organisational (and organisational segment) performance. Chapter 11 will discuss the use of budgetary control reports to monitor and control the organisation’s performance.
224
8.4 Management accounting compared with financial accounting Before beginning our discussion of the provision of cost information as a basis for management decisions, it will be useful to review the differences between the financial accounting information that we have covered so far in this book and the management accounting information which we will be considering in the remaining chapters. The differences between management accounting and financial accounting stem from the different information needs of the people who are using the two types of information. If you have forgotten who might be included in the wide range of users of accounts, refer to Chapter 1 of this book to refresh your memory.
The main differences could be summarised as follows: ◆ Management accounting reports are for internal use only.
Financial accounts are prepared to satisfy the information
In most companies, the production of management accounts (and many other aspects of the business) is regulated by internal audit departments – which can be more rigorous in their investigations than many external bodies.
◆ Many management accounting reports are prepared for
a specific, one-off purpose. For example, a management accounting report may be prepared to help with a particular decision, or a report might be addressed to and designed for a particular manager within the organisation. Financial accounting reports tend to be more general purpose. Most are prepared on a regular, routine basis and they are designed to be useful to a wide range of potential users.
Accounting in a Nutshell
needs of a variety of users both internal and external to the business. ◆ Management accounting reports are usually very detailed. If they are to be effective in supporting managers in the decision-making process, many management accounting reports need to be provided in considerable detail. Financial accounting statements provide an aggregated overview of an organisation’s performance. ◆ Management accounting reports often provide forecast information as well as historical information. Management accounting tends to be more forward-looking whereas financial accounting statements are largely historical, providing information about past performance. However, certain types of financial accounting reports may contain projected information. For example, a company might issue forecasts to external users when it is attempting to raise more capital. ◆ Management accounting reports are not regulated by external bodies. Because they are prepared for internal use only, management accounting reports may contain any information that is useful for the managers who are to use it. This information may be presented in any way that suits the needs of the organisation, and there are no external regulations to restrict this freedom. In contrast, the content and presentation of published financial accounting statements are regulated by a series of accounting standards, partly by company law and, for listed companies, by additional stock exchange requirements. These regulations are designed to protect the external users of financial accounts, so that they can be sure that all organisations’ accounts are prepared on a standardised basis.
225
◆ Management accounting reports tend to be produced more
frequently than financial accounting reports. Most organisations publish their financial accounts once a year in their annual report. Many also publish abbreviated interim reports on a halfyearly or quarterly basis. In contrast, management accounting reports can be prepared monthly, weekly or even daily to allow managers to monitor current results on a regular basis.
Accounting in a Nutshell
8.5 Summary
226
(1) Management accounting provides the detailed, forward-looking information that managers need to help them to manage the business. (2) Management accounting contains three core activities: participation in the planning process, the initiation of and the provision of guidance for management decisions, and contributing to the monitoring and control of performance. (3) A number of differences can be identified between management accounting and financial accounting. These differences stem from the different information needs of the people who are using the two types of information.
Using Financial Information to Manage a Business
8 Management Accounting as an Aid to Management
8.1 Introduction In the remainder of this book we will be looking at the financial information which is necessary to help managers to run the business; that is, we will be discussing the internal management accounts which are not usually made available to the public. In this chapter we will be reviewing the need for management accounting information and discussing the differences between financial accounting and management accounting.
The financial information that you have learned about so far in this book has been in aggregate form. However, aggregate income statements and balance sheets prepared on an historical cost basis do not provide the answers to questions such as the following: ◆ What did it cost to operate Department A last period? ◆ What will it cost to operate Department B next period? ◆ If we decide to close Department C and instead outsource the
work undertaken in that department, what will be the effect on the organisation’s total cost? ◆ Should we accept this order for a batch of Product X? ◆ What price should we charge for a delivery from London to Edinburgh? ◆ Will the proposed investment in new computer equipment be worthwhile? The financial accounting information that we have reviewed so far will not help managers to answer these questions. More detailed and forward-looking information is needed, and this need is met by an organisation’s management accounting system. The management accounting department provides an internal information service to managers to help them to manage.
Accounting in a Nutshell
8.2 The need for detailed management accounting information
223
8.3 The core activities of management accounting The main activities of the management accounting function could be described as follows:
Accounting in a Nutshell
◆ Participation in the planning process at both strategic and
operational levels. In Chapter 11 we will be reviewing the role of financial budgets in the planning process. ◆ The initiation of and the provision of guidance for management decisions. Chapters 9 and 10 will demonstrate how cost information can be analysed to assist managers in their decisionmaking role. In Chapter 12 we will review the main investment appraisal techniques that are used as a basis for making capital investment decisions. ◆ Contributing to the monitoring and control of performance through the provision of reports on organisational (and organisational segment) performance. Chapter 11 will discuss the use of budgetary control reports to monitor and control the organisation’s performance.
224
8.4 Management accounting compared with financial accounting Before beginning our discussion of the provision of cost information as a basis for management decisions, it will be useful to review the differences between the financial accounting information that we have covered so far in this book and the management accounting information which we will be considering in the remaining chapters. The differences between management accounting and financial accounting stem from the different information needs of the people who are using the two types of information. If you have forgotten who might be included in the wide range of users of accounts, refer to Chapter 1 of this book to refresh your memory.
The main differences could be summarised as follows: ◆ Management accounting reports are for internal use only.
Financial accounts are prepared to satisfy the information
In most companies, the production of management accounts (and many other aspects of the business) is regulated by internal audit departments – which can be more rigorous in their investigations than many external bodies.
◆ Many management accounting reports are prepared for
a specific, one-off purpose. For example, a management accounting report may be prepared to help with a particular decision, or a report might be addressed to and designed for a particular manager within the organisation. Financial accounting reports tend to be more general purpose. Most are prepared on a regular, routine basis and they are designed to be useful to a wide range of potential users.
Accounting in a Nutshell
needs of a variety of users both internal and external to the business. ◆ Management accounting reports are usually very detailed. If they are to be effective in supporting managers in the decision-making process, many management accounting reports need to be provided in considerable detail. Financial accounting statements provide an aggregated overview of an organisation’s performance. ◆ Management accounting reports often provide forecast information as well as historical information. Management accounting tends to be more forward-looking whereas financial accounting statements are largely historical, providing information about past performance. However, certain types of financial accounting reports may contain projected information. For example, a company might issue forecasts to external users when it is attempting to raise more capital. ◆ Management accounting reports are not regulated by external bodies. Because they are prepared for internal use only, management accounting reports may contain any information that is useful for the managers who are to use it. This information may be presented in any way that suits the needs of the organisation, and there are no external regulations to restrict this freedom. In contrast, the content and presentation of published financial accounting statements are regulated by a series of accounting standards, partly by company law and, for listed companies, by additional stock exchange requirements. These regulations are designed to protect the external users of financial accounts, so that they can be sure that all organisations’ accounts are prepared on a standardised basis.
225
◆ Management accounting reports tend to be produced more
frequently than financial accounting reports. Most organisations publish their financial accounts once a year in their annual report. Many also publish abbreviated interim reports on a halfyearly or quarterly basis. In contrast, management accounting reports can be prepared monthly, weekly or even daily to allow managers to monitor current results on a regular basis.
Accounting in a Nutshell
8.5 Summary
226
(1) Management accounting provides the detailed, forward-looking information that managers need to help them to manage the business. (2) Management accounting contains three core activities: participation in the planning process, the initiation of and the provision of guidance for management decisions, and contributing to the monitoring and control of performance. (3) A number of differences can be identified between management accounting and financial accounting. These differences stem from the different information needs of the people who are using the two types of information.